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During the quarter we began to address some of the prerequisites to the next phase of establishing commerciality of the Utica shale.
This next phase will be a major step on the path to commercialization. It will require an investment of several hundred million dollars for a 30-50 well program to optimize costs on a per well basis and demonstrate commercial recovery rates. We view the prerequisites to this investment as follows:
• Gathering additional technical data from the pilot horizontal well program;
• Development of a local service sector;
• Passage of new hydrocarbon legislation and social acceptability; and
• General improvement in market conditions.
Highlights
• Gentilly horizontal well test meets expectations at an initial stabilized rate of 720 Mcf/d from three fracs in the middle Utica or approximately 240 Mcf/d per frac
• Completion of Fortierville and St. Gertrude horizontals deferred by operator to the first half of 2011
• Concluded pipeline agreement and commenced permitting a 3-D seismic program for the commercial demonstration project targeting the St. Edouard area
• Cash flow from operations of $1.44 million and production of 649 boe/d with improved operating efficiencies during the quarter
• Sustained financial position with over $154 million in positive working capital and no debt
St. Lawrence Lowlands, Québec
The results from Gentilly added another valuable data point to the learning curve.
The abbreviated horizontal well was completed with three fracs in the target middle Utica interval and two fracs in the lower Utica interval instead of the planned eight fracs in the middle Utica. The average flow rate over the first 30 days was 720 Mcf/d and 700 Mcf/d during the last week. The well was continuing to clean up and exhibited minimal decline during the test.
Given the limited contribution observed from the lower Utica, we are pleased with the results from the middle Utica interval in this well. It is consistent with our current expectations of 250 Mcf/d per stage. Early analysis of the production data indicates a type curve similar to the Barnett or Fayetteville shale with lower initial rates and declines compared to more over-pressured shale plays. This contrasts with the predicted type curve from the St. Edouard horizontal that is more akin to the Haynesville shale where high over-pressuring and extensive natural fracturing contributed to higher initial rates and a more marked initial decline.
We expect the completion of the horizontal wells at St. Gertrude and Fortierville will yield valuable technical information as we classify the different play types within the deep fairway. This information is essential to locate our demonstration project, the first step to establishing commerciality. This project will include a multi-well pad and a pipeline to connect to the GazMetro distribution system. We have initially targeted the St. Edouard area with preliminary work including a pipeline agreement and permitting for 3-D seismic to identify pad locations.
We were anticipating that the results from the remaining two horizontal wells would be available this fall and allow us to finalize the decision on the demonstration project before year-end. We are disappointed by the operator’s decision to defer this completion to the spring. While the costs were higher than we expected, relative to the delay in the project, we believe this would have been a prudent investment.
The higher costs for the completion equipment relate largely to mobilization from Western Canada and underscore the importance of another prerequisite to establishing commerciality – the development of a local service sector.
These material incremental costs and lack of equipment in the area hinder the cost reductions and economies of scale we need to achieve profitability. For a service sector to support our activities, they will require a commitment from industry to ensure the equipment will be adequately utilized. In turn, this commitment to invest several hundred million dollars will require a commitment from the people of Québec and the government to an efficient regulatory and stable fiscal regime.
To this end, public advocacy has been our top priority over the last six months. We have been actively involved in the national and provincial media to address the myths about shale gas development perpetrated by US-based political groups and focus on the facts about our industry. We have held numerous meetings with municipal officials and open houses with their constituents to communicate the potential economic benefits from an active service sector.
Coincidentally, we are beginning to see local support growing. A new organization, Movement d’Appui au Gaz de Shale, was established this October with over 300 individuals and service companies that support the development of the Utica shale. Cégep de Thetford, a college in Québec, is considering introducing oil and gas courses to train Québecers for the job opportunities that a local service sector would bring.
During the quarter, the Ministry of Sustainable Development, Environment and Parks mandated the Bureau d’audiences publiques sur l’environnement (BAPE) to propose a framework for shale gas development in Québec. The mandate was not to determine if shale gas will be developed, but rather how. The public hearings will be drawing to a close shortly and the BAPE is scheduled to present its recommendations to the Ministry this winter.
We expect the Ministry of Natural Resources to subsequently table new Hydrocarbon legislation this spring. Our recommendations for this new legislation include a stable, effective and competitive regulatory and fiscal system with an oil and gas bureau similar to the Oil & Gas Commission in British Columbia or the Energy Resources Conservation Board in Alberta.
Operational & Financial
We invested in further light oil development drilling at Antler, Saskatchewan, based on the results from our initial wells. A total of 13 gross wells have been drilled to date. With completion equipment at an unprecedented 100% utilization in the area and inclement weather delaying operations, we are hopeful to have these wells tied-in before year-end.
The gradual replacement of our low margin gas production from Western Canada with high netback light oil is beginning to impact our financial results. Coupled with improved operating efficiencies, we generated cash flow of $1.44 million for the quarter with average daily production of 649 boe/d.
Spending in Antler accounted for just over 50% of our capital expenditures of $8.61 million in the quarter. The remainder was primarily invested in Québec drilling and completing the pilot horizontal wells along with a $1.48 million land acquisition in Manitoba targeting light oil opportunities.
Outlook
The investment in light oil production at Antler will increase the value of our assets as a source of development capital for Québec.
We are looking forward to the completion and testing of St. Gertrude and Fortierville next year and further work on our commercial demonstration project in the St. Lawrence Lowlands. Despite the delays to the previously announced timeline, we intend to use this time to lay the groundwork for the next phase. The additional technical information and new hydrocarbon legislation will give industry the comfort it needs to make the necessary investment in the multi- well program. A local service sector will follow which increases the likelihood of optimizing well costs. This will move the Utica out of the pilot phase and, with continued success, to validating the reserve potential of this massive resource.
Michael Binnion
President and Chief Executive Officer |
Contact Us:
adido@questerre.com
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